Milliband vows to cap energy prices…(But his speech ignited a backlash that a cap could drive down investment in energy capacity and manufacturing.)

Ed Miliband set his party on a collision course with the ‘big 6’ energy companies after telling his conference that, if elected, he plans to set in place laws to freeze gas and electricity bills for 20 months.

According to the shadow prime minister, “your bills will not rise” as a result of a policy that could “save hundreds of pounds a year”. In his attempt to restore faith in the energy market Miliband also pledged to replace the energy regulator Ofgem with a new institution that has greater power. Labour claim that such a move would enable savings of up to £120 for consumers and £1,800 for businesses.

Michael Fallon, Minister of Businesses and Enterprise, raised concerns that it could result in serious repercussions if it were to go ahead: “It will freeze new investment and only increase the risk of lights going out. Ill thought out, irresponsible.”

Last year the energy industry invested £11.6bn, and over the next decade another £110 bn of investment is required in order to maintain current supplies. Energy UK stated “freezing bills may be superficially attractive, but it will also freeze the money to build and renew power stations.” Reports suggest that the ‘big 6’ were not consulted on the proposal and stand to lose £4.5bn if it goes ahead.

Mr. Miliband promised that the proposed cap would not harm crucial energy investment. But, it could be seen as an embarrassing contradiction for him and his party if Labour wins the next election and investment falls as a result.

According to Ofgem, UK spare capacity could fall to 25% by 2015. Therefore the best strategy, given the current climate, would be to incentivize energy investment via nuclear, gas, shale, renewables or a combination of these to counter this threat. In the US, the recent rise in domestic energy production has increased supply and caused a 40% fall in gas prices.

Despite claims that the policy could lead to annual savings by businesses, an even more uncertain energy environment could deter investment. With business investment 25% lower than pre-recession, the UK economic recovery is in its infancy and vulnerable to stalls. Business investment will need to be secure and sustainable.

If economic history tells us anything, it’s that price controls contrived as a solution to market failure tend to end in disaster. Miliband correctly identified two failures: excessive prices and underinvestment. However, excessive prices are a likely symptom of underinvestment. In any event, if any party is to achieve lower long term prices, then a long term energy supply strategy must first be secured.